KC Fed Sees Tough Farm Economy

Seeing Lower Farm Income and Prices, Bankers Report Tougher Credit Climate as Well

Bankers across the Kansas City Federal Reserve Bank's region reported that nearly 30% of the dollar volume of their farm loan portfolios was experiencing at least minor repayment problems Bankers reported higher problems in Nebraska and the Mountain States where more than 35 percent of loan dollar value was under some kind of repayment pressure. (Chart from KC Fed's Second Quarter Ag Credit Survey)

WASHINGTON (DTN) -- Unsurprisingly, the farm economy throughout much of the Plains dipped in the second quarter of 2018 along with a sharp decline in prices for farm commodities, according to the Kansas City Fed's quarterly Ag Credit Survey.

Along with a poorer economic situation, the Federal Reserve's Tenth District also reported credit conditions for farmers are deteriorating, and bankers are also seeing a modest rise in problems with loan repayment. That's also translating to a small rise in bankers declining loan applications.

The Tenth District, based in Kansas City, Missouri, includes Kansas, western Missouri, Nebraska, Oklahoma and mountain states, including Colorado, northern New Mexico and Wyoming.

The decline in farm income "accelerated" as crop prices fell in June. Bankers reported a sharp decline in prices, especially prices for corn and soybeans, which each fell 17% in June. The district survey added that income is expected to remain subdued in the next three months, "but that effect could be exacerbated in states more heavily concentrated in commodities -- such as soybeans -- that have been targeted by retaliatory tariffs."

In Nebraska and Missouri, which more heavily grow corn and soybeans, more than 50% of respondents to the Fed's survey expect farm income to fall in the next three months. Along with that, nearly 90% of bankers in those states also indicated weaker overall business activity as a result of the agricultural economy in the states.

The results were a little better in Oklahoma and mountain states with 35% of respondents expecting income to be lower in the next quarter. About 60% of bankers in those states cited weaker overall business activity. Oklahoma was one of the strong points with only 27% reporting weaker activity.

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Demand for farm loans in the district remains high, but bankers expect loan demand to increase over the next quarter, as well, "reflecting anticipated increases to operating loan balances through the end of the growing season."

At the same time, the survey shows the loan-repayment rate is deteriorating slightly after improving in the last quarter of 2017. And the pace of loan renewals and extensions is gradually declining with banks as well.

Loan-repayment problems overall are building on increases in recent years. The survey stated, "On average, bankers across the district reported that nearly 30% of the dollar volume of their farm loan portfolios was experiencing at least minor repayment problems." Nebraska and mountain states reported slightly higher problems with repayment.

District wide, about 3-4% of loans fell into the "severe repayment problems category" while the "major repayment problems" took up about 10% of loans and "minor repayment problems" accounted for about 17-18% of the loan issues that bankers reported.

The issues with repayment have led bankers to increase denials for loan applications, even though most banks reported they had denied relatively few applications overall. Still, the Fed survey noted the percent of bankers denying at least 4% of operating loans has increased steadily since 2015.

The price of all loans is also inching upward. Both variable-rate and fixed-rate loans for operations, machinery and farmland are steadily higher with the cost of fixed-rate operating loans above 6.25% compared to under 6% a year ago. That's about the same for machinery loans, while real-estate loans are hovering at the 6% mark but up more than 0.25% from the same time last year.

All that said, farmland values generally remain steady, but under continued pressure due to those higher rates. The survey says the value of irrigated cropland in the district is about 4% below last year's value. The decline in value for irrigated land was a little steeper year over year in Nebraska with a 7% drop in value. Non-irrigated land continues to hold much of its value as the district noted, "The year-over-year decline in the value of non-irrigated cropland was the smallest since early 2015, a time when values for all and types began to decrease from historical highs."

Rangeland in Mountain states (Colorado, northern New Mexico and Wyoming) and Oklahoma, however, are growing in value at a 6% bump above 2017 values.

Coupled with that lower income, about half the bankers in the district reported lower capital expenditures by farmers, and 30% reported lower household expenditures as well. Bankers generally expect farmers to continue reducing spending in the coming months, though the survey did not forecast that as sharply as in previous quarters.

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Chris Clayton

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